News & Events Listings

With the Budget Sequester still set to take effect on March 1, 2013, unless Congress acts to again "kick it down the road", both Republicans and Democrats are trying to position themselves as the voice of reason. The Democrats are proposing a new bill calling for an equal amount of tax increases and spending cuts. The Republicans are threatening to allow the Sequester to go into effect unless the President scraps his desire to further raise taxes and agrees instead to substantial spending cuts.  The following will detail these maneuverings and other legislative developments. Also, with this edition, we will begin to explore some 2013 tax planning ideas presented by Obama Care and the recently enacted  American Taxpayer Relief Act of 2012 ("ATRA").

  1. Certain of the Income Tax Changes Resulting From ATRA May Adversely Affect Taxpayers With Children – ATRA has reinstated the phase out of personal exemptions and the limitations on itemized deductions for higher-income taxpayers (for unmarried taxpayers, the threshold is adjusted gross income of $250,000 and for married taxpayers filing jointly, the threshold is adjusted gross income of $300,000). These limitations, albeit at different thresholds, were initially enacted into law in 1990 but were eliminated in 2010. Under the phase-out, the total amount of personal exemptions that can be claimed by a taxpayer is reduced by 2% for each $2,500 by which the taxpayer's adjusted gross income exceeds the threshold amount. And, under the limitation on itemized deductions, the total amount of the taxpayer's itemized deductions is reduced by 3% of the amount by which his adjusted gross income exceeds the threshold amount, but not by more than 80%. According to a report issued on February 4, 2013 by the Congressional Research Service, this phase-out and limitation "could be perceived as unfair" because they would affect taxpayers with children more than those without children.

    For higher income taxpayers (i.e., those with taxable incomes above $400,000, if single, or $450,000 for married taxpayers filing jointly), ATRA has resulted in marginal tax rates that are higher for their top rates. Considering the time value of money, the higher tax rates would tend to encourage these taxpayers to accelerate their itemized deductions to the extent possible (to keep their taxable incomes as low as possible). But, in view of ATRA's reinstatement of the limitation on itemized deductions, taxpayers should give serious consideration to whether they should be accelerating their itemized deductions. To do so could result in losing the maximum tax benefit of those itemized deductions because the above-referenced limitation may apply.

  2. IRS Now Permits a "Standard" Home Office Deduction – The IRS announced in Revenue Procedure 2013-13 that it will now allow taxpayers who otherwise qualify for the home office deduction to automatically deduct $5 per square foot of office space up to 300 square feet, whether or not the taxpayer has receipts for the actual cost of the home office (such as utility bills, repair bills, rent invoices, etc.). Taxpayers should note that any election to use the "standard" home office deduction is irrevocable. However, while an election in any given year is binding once made, Revenue Procedure 2013-13 provides that this "safe harbor" election does not constitute an accounting method, and taxpayers are free to change their approach from one year to the next.
  3. President Obama Endorses Tax Reform, Including Tax Increases, In His State of the Union Address – In his February 12, 2013 State of the Union address, President Obama remarked that "Now is our best chance for bipartisan, comprehensive tax reform that encourages job creation and helps bring down the deficit". In connection with his address, the White House put out a fact sheet that stated that the President's plan for tax reform will call for lowering the tax rate that applies to corporations (with even lower tax rates for manufacturers), expanding and making permanent the research and development credit, and establishing a minimum tax on offshore earnings. In his address, the President also stated that new revenue (i.e., new taxes) is still needed to narrow the budget deficit in a "balanced way". In response to his call for new revenues, Congressional Republicans have gone on record as being opposed to raising additional tax revenue from anyone after having agreed in ATRA to increasing taxes on certain higher-income taxpayers.
  4. Senate Democrats Present Their Plan to Postpone Sequester – Senate Democrats are poised to take up a combination of budget cuts and revenue-raising measures during February  in an effort to avoid the deeper budget cuts that would occur under the Budget Sequester scheduled to take effect on March 1, 2013. The Democrats intend to introduce legislation that would reduce the deficit by at least $100 billion, with approximately $50 billion coming from spending cuts and the other $50 billion coming from tax increases. The tax increase being contemplated by the Democrats would come from a new income tax that would be imposed on individuals earning more than $1 million annually (the so-called "Buffett Rule"). If enacted, the effective date of the pending Budget Sequester would be postponed from March 1, 2013 to January 1, 2014. The likelihood of such bill being passed is, however, remote, since Republicans have said they are finished looking for ways to raise more money from taxes.
  5. More Movement on Subjecting Internet Sales to State Sales Taxes – Sen. Richard Durbin (D-ILL) has stated that he will propose legislation in the Senate (the "Marketplace Fairness Act") to allow states to require web-based retailers to remit state sales taxes to those states in which purchases are made by residents of the state. The proposed legislation is a revision of a bill Sen. Durbin first introduced in 2012. Sen. Durbin hopes that the revised bill adequately addresses an issue highlighted by a 1992 decision of the U.S. Supreme Court. This decision prevented states from compelling companies selling goods over the internet from collecting state sales taxes if they had no physical presence in that state.
  6. IRS Issues New Regulations On the New 3.8% "Net Investment Income" Income Tax – As a result of Obama Care, a new 3.8% income tax on "net investment income" goes into effect January 1, 2013 for certain higher-income taxpayers. This new tax is imposed on the lesser of (i) the taxpayer's "net investment income" for the tax year, or (ii) the excess of the taxpayer's "modified adjusted gross income" ("MAGI") for the year over the "threshold amount". For this purpose, the "threshold amount" is $200,000 for single taxpayers, or $250,000 for married taxpayers filing jointly, or $125,000 for a married taxpayer filing separately. On November 30, 2012, the IRS issued new proposed regulations which seek to address many of the statutory gaps in the application of this new tax. These proposed regulations suggest at least one important planning tool in avoiding or at least minimizing the tax. For example, if a taxpayer has "net investment income" (for example, taxable interest income"), the taxpayer should consider reducing his MAGI by increasing his 401(k) deferrals, as demonstrated below.

    TAX PLANNING TIP 2:     
    As noted above, the 3.8% new income tax on "net investment income" will not apply to anyone with a MAGI at or below the threshold level described above. Therefore, assume a single person has MAGI of $210,000 for 2013, and $15,000 in net taxable interest income (i.e., "net investment income" of $15,000), before taking into account any 401(k) deferrals for 2013. If, however, the taxpayer is a participant in a 401(k) plan and if he is able to do so, he should consider increasing his 401(k) deferrals by $10,000 for 2013. By doing so, he thereby reduces his MAGI to $200,000. The excess of his MAGI over the threshold amount is zero ($210,000-$10,000-$200,000). Since the new 3.8% income tax is levied only on the lesser of this excess ($0) or his net investment income ($15,000), the tax is eliminated.

  7. Budget Sequester Update:
  • Bowles and Simpson Ride to the Rescue?On February 19, 2013, Erskine Bowles and Alan Simpson, the co-authors of the so-called "Simpson-Bowles Plan", released an updated version of their original deficit reduction plan. Their new plan calls for $900 billion more in deficit reduction than the plan mentioned by President Obama's inaugural address. Their plan is vague about specifics, but, in general, it calls for about $600 billion in new tax revenues and $600 billion in purported savings involving health care spending. Also calling for some other spending cuts (involving reductions in discretionary budget items, adopting new inflation-indexing, and lower interest costs), their revised plan proposes a 3-to-1 ratio of spending cuts to new tax revenues.
  • President Obama Calls on Republicans to Act to Head Off Sequestration – Also on February 19, 2013, President Obama issued a statement urging Republicans to compromise their stated opposition to any new tax increases, and instead agree with him on the need to adopt "targeted" tax increases as well as certain spending cuts in order to avoid having the Sequester take effect.  If the Sequester takes effect, defense and non-defense discretionary spending would be cut evenly by about $85 billion (i.e., by about $42.5 billion each) for the fiscal year ending September 30, 2013. In a conciliatory gesture to Republicans, the President stated that he is willing to cut spending that is not needed, get rid of programs that are not working, and offer reforms to various (but unnamed) health care entitlement programs. In return, the President wants "to save hundreds of billions of dollars by enacting comprehensive tax reform that gets rid of tax loopholes and deductions for the well-off and well-connected, without raising tax rates". The President then remarked that if Congress cannot get an agreement by March 1, when the Sequester is scheduled to take effect, then at a minimum, Congress should pass a smaller package of spending cuts and tax reforms to prevent the Sequester spending cuts, and buy time to pass a more comprehensive budget.

For additional information regarding this topic, please contact your local UHY LLP professional.